1. Field of the Invention
The present invention relates generally to a financial security product and management system and, is more specifically directed to a financial security product and methodology for deducting the fees and costs associated with the management of a financial security from a periodically declared dividend.
2. Description of Related Art
Financial securities such as variable annuities or mutual funds, are managed by financial service providers in return for a fee. Investors buy units of the financial security at a certain price in the belief that the price of the units will appreciate. In the past, the fee (including expenses and costs) associated with managing these securities was regularly charged to the investor's account. This would typically result in a reduction in the number of units of the financial security held by the investor or a reduction in any cash reserves in the account. These reductions were not well received by investors. Investors were confused by the amount and purpose of the reductions. In addition, the reductions left a negative impression of the investment insofar as the number of units was decreased as opposed to increased over certain periods of time.
In an effort to overcome these objections, many financial service providers began periodically deducting the fee as a flat percentage fee of the unit price or valuation of the financial security. While this unit price deduction method is useful, it restricts the financial service provider's flexibility in offering multiple options to its customers. If a financial service provider wants to offer its customers a financial security product with several optional benefits, it can offer each optional benefit and combination of optional benefits as part of a separate financial security product and deduct the fee associated with that benefit or combination from the unit price. This results in each product having a separate unit price. For example, if there is one optional benefit, the financial service provider will offer two separate products from which it's customers can choose, one having the benefit, one without. This works well if the financial service provider is only providing one or two optional benefits, but having even three optional benefits would result in eight separate products for the financial service provider to track. Thus, the financial service provider will likely be required to charge a much higher fee for offering a substantial array of options.
Financial service providers can alternatively offer one financial security product and keep track of separate unit prices for each possible combination of optional benefits. The financial service provider must determine which of the benefits each investor selected and then deduct the applicable fees associated with the selected combination of benefits. Thus, instead of having one simple unit price for the financial security product, the financial service provider must track a separate unit price for each possible combination of optional benefits. Again, this is feasible with two or three options, but the burden on the financial service provider grows exponentially with the addition of each new option.
In view of the foregoing, it is believed that there is a need in the financial service provider industry for a method to efficiently deduct or charge an investor for the fee (including costs and expenses) associated with managing a financial security product. In addition, there is a need for such a method which will enable the financial service provider to offer optional benefits in conjunction with a financial security without the oppressive burden of maintaining numerous separate share prices or offering separate products for each possible combination of benefits.